CFA Practice Question

There are 252 practice questions for this study session.

CFA Practice Question

If the credit spread on the reference entity < coupon rate on a CDS, upfront premium will be paid by:
A. protection buyer.
B. protection seller.
C. neither party.
Explanation: In this case the PV of protection leg < PV of premium leg.

User Contributed Comments 2

User Comment
cminor Remember that the CDS coupons are standardized in the market (1% for investment grade and 5% for high yield) so there is usually some payment up front to true up. If I am assigned a 5% coupon to pay even though my premium/spread is 3% because I am a bit "safer" than the standard 5% I am paying, I get some money up front = (spread - coupon) x duration x notional principal.
darbyland just think of it as "the seller is receiving more than the risk he/she has taken" - to induce the protection buyer to get into CDS with him, protection seller has to pay that protection buye
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